What To Do If Your Credit Score Is Whack And You're Broker Than Broke
Our resident dolla-bill doula is back at it this month with a fresh installment of "Extra Credit."
This week, financial advisor Pamela Capalad of Brunch and Budget offers some highly practical advice on how to build your credit back up when all seems hopeless, as well as focusing on the nitty gritty (and not the shiny rewards) when it comes to selecting a good credit card.
My credit score is 544. Yeah. I'm 23, and I just graduated in May, so I'll have to start paying off my students loans in January. I work part-time and I'm working hard to gain social media clients to generate more income. My expenses are pretty low because I live with my aunt and uncle, but I really want to move out, get a new car, and run my own business full time. I really want to boss up, and improving my credit and finance is so important to me right now. What can I do right now to repair my credit while my income is only $1,500 a month? Also, how can I get smart about finance?
-Credit Score Cringing
Yesss, I love that you want to boss up, CSC! I hear you on wanting to move out and get a new car, but by living with your aunt and uncle, you have more financial and mental latitude to focus on saving a ton and growing your business. It’s great that you can keep your personal expenses low while you’re building up your income.
To start rebuilding your credit, I highly recommend getting a secured card. The way a secured card works is you act as your own partial creditor. One of my fave secured cards is the Capital One secured card. They will issue you a small credit limit, usually between $200 and $300, and you will be required to put down a deposit of $49 to $200. In exchange, the card will report your credit activity to the credit bureaus.
Secured cards are designed to help people with low or no credit scores to build up their credit, and I’ve sometimes seen it take less than a year for a client to increase their score by 100 points and qualify for a regular credit card.
Once you get the secured card, the most important thing to keep in mind is to keep the balance below 30 percent of the limit. Instead of using the card regularly, I recommend you put a small, recurring bill on it, like Netflix, Hulu, Spotify, etc. Then, set up auto-pay so it looks like you’re “using” the card without you needing to worry about managing your balance or payments.
To get smart about finance, first, understand where your own money is going by using an app like Mint. Read blogs, listen to podcasts (this is mine, but there are tons of others) and go to workshops, and soon you will start to get familiar with financial words and concepts. It will feel overwhelming at first, but the more you expose yourself to this information, the more you’ll be able to integrate it into your own financial life.
Your advice on how to manage your credit cards has been so helpful. That being said, in the event that I do want to open a new card, what cards would you recommend? What does a "good" credit card look like?
I feel like we’ve become so obsessed about credit card points and rewards that we’ve lost sight of what’s important about choosing a good card. Before even considering what the rewards are, I would look out for the following:
- What is the max interest rate on the card? While the intention is always to pay off the balance every month, that may not always be how it pans out. On average, your minimum payment on your card is about 2 percent of the balance, which means if your interest rate is higher than 24 percent (2 percent per month, times 12 months), then you will find yourself paying interest on your interest if you can only afford to pay the minimums.
- What is the annual fee? Unless you feel like you’ll be spending enough and getting enough rewards to be OK paying this fee, go with a no or low-fee card. It hurts your credit score to close a card, so for the most part, you want to open a card that doesn’t cost you much to keep it open.
- What is the identity theft protection and coverage? In my experience, the big credit card companies like Amex, Chase, CapitalOne, etc. are putting a lot more resources into catching ID theft before or right after it happens. Don’t be shy about calling a credit card company and asking how they protect your identity.
- If you want to travel with the card, do they waive foreign transaction fees? A lot of travel cards are now waiving foreign transaction fees as one of their perks, and this is something to look out for if you travel a bunch or have an overseas trip on the horizon.
- Do they give you a free credit score? A lot of the big credit card companies will provide you with your credit score for free nowadays, which is awesome! Find a card that does this if it’s important for you to be able to track it regularly.
Got a question for Pamela? Submit it HERE and we'll answer it in an upcoming installment of "Extra Credit."
Words: Pamela Capalad